The Myth of the Labor Shortage

The emergence of the Coronavirus pandemic catalyzed a labor shortage that has been unrivaled in the United States labor market since World War II (Dean 2022). The labor market tightened, manifesting in an increasingly high demand for labor contrasted by a decline in labor supply, and has since been unable to return to its pre-pandemic levels (Bhattarai 2022). These conditions have persisted through 2022, with nearly 11 million job openings emerging but only 6 million unemployed workers as of  August 2022 (Bhattarai 2022a). Despite a return to social normalcy, the current labor force participation rate is 62.4% (Ezrati 2022), an entire point lower than the pre-pandemic rate. While seemingly inconsequential, this equates to a loss of over 3.4 million workers even after accounting for population growth and aging (Guilford 2022). Two key questions thus emerge: What is driving the decline in labor supply? What implications does the labor shortage have for the United States economy? 

The Coronavirus pandemic caused a massive restructuring of the US labor market, prompting a  heightened demand for safety, well-being, and childcare, prompting many to leave jobs in industries characterized by low wages, minimal benefits, and unfavorable working conditions. A majority of available jobs are concentrated in the aforementioned industries, indicating that the labor shortage is being driven by the minimal supply of quality employment opportunities.  The labor shortage poses substantial risks to the fiscal well-being of the US and, if not addressed, could spark a recession.

To explain the labor shortage, economists repeatedly refer to a movement called the "Great Resignation,” a phenomenon commencing at the start of the pandemic, which involved an estimated 3.6 million Americans resigning from their jobs every month (Bhattarai 2022c). This is purported to be a result of early retirement among the general population and childcare responsibilities forcing women out of the workforce (Bhattarai 2022c). Within the last two years,  3 million Americans have retired within the first 18 months of the pandemic (Tanzi and Sasso 2022), and approximately 1.4 million women have left the labor force (Fred 2022; Heggeness et al. 2021). While these were significant losses for the workforce, they do not explain the magnitude of the resignations that have occurred, which totals over 43 million workers annually. Furthermore, this account overlooks evidence indicating that since February 2020, hiring rates have greatly surpassed those of resignation rates (Nelson 2022), and a majority of those who leave their jobs remain employed through other means (Fox 2022).  

Rather than a “Great Resignation,” the market can be characterized as a "Great Reshuffling” (Ferguson 2022).  Job resignations are not equally dispersed among all market sectors but were rather concentrated in industries dominated by “low quality” jobs in which workers receive low pay and benefits (Schweitzer and Khattar 2022). These are most notably hospitality and accommodations, food service, retail trade, education, health services, and manufacturing sectors (Schweitzer and Khattar 2022). 

The most probable explanation for this is that the Coronavirus pandemic has led many to rethink their job choices and  make safety, flexibility, benefits, and the mental health effects of work more salient in their expectations (Fox 2022). Many Americans now seek jobs where they feel respected and valued, have opportunities for personal and professional growth, and are provided with financial security (Conway 2022). Over half of those who leave their jobs but remain employed were able to find work in industries with higher paying, higher quality jobs that allow for greater flexibility and autonomy(Schweitzer and Khattar 2022). 

Not only have these low-quality jobs been the most vacated, but they also remain the hardest to fill. Labor shortages are most evident in the same industries that contain low-quality jobs (Howard 2021; Schweitzer and Khattar 2022; Schweitzer 2022). The US Private Sector Job Quality Index reports that most jobs added to the market have been of low quality (University of Buffalo n.d.). The labor shortage problem, therefore, does not lie within the workforce but rather within businesses. As described by the executive director of the Economic Opportunities Program at Aspen Institute, Maureen Conway, states that the labor shortage “the deserved outcome of a systemic failure to value workers”(Conway 2021). 

The labor shortage presents many adverse consequences to the US economy. Due to rising wage rates, the labor crisis has the potential to heighten inflation, which already stands at a 40-year high (Guilford 2022; Kochhar et al. 2022). The market overall saw an average salary growth of 5% (Kochhar et al. 2022), and because tight labor markets afford workers greater power and selectivity, increases are likely to persist. While advantageous for the pockets of workers, rising wages also increase production costs for companies, causing them to outsource, increasing costs to consumers by raising the price of products (Smialek and Casselman 2022). 

The US Gross Domestic Product (GDP) additionally faces three significant threats. The cost of lost wages is predicted to be anywhere from $170 billion to $240 billion alone each year (Bach 2022). Labor shortages also adversely impact the supply chain, decreasing productivity and increasing wait times, which has already contributed to a decline of over 1.4% of the US’ GDP (Cook 2022; Zandi et al. 2022, 5-6). Moreover, labor shortages also impact the profitability of individual industries. Manufacturing alone is set to face losses of  $1 trillion each year if the shortage continues to increase at its current rate (Egan 2021), an alarming reality given that this sector accounts for roughly an average of 11% of the GDP (Egan 2021). Lastly, while tight labor markets are usually viewed to affect the stock market positively, economic threats have endangered markets, exemplified in the recent S&P 500 and Nasdaq declines (Levin 2022). 

The Federal Reserve Board (FED) advocates raising interest rates to tackle the deterioration of the GDP, extrapolating that increasing the cost of business operations will cut the demand for labor and increase competition (Reich 2022). However, this is an unpromising solution for many reasons. Increasing the costs businesses have can harm the economy and increase inflation. Although wages have increased, the rising costs that result from inflation have negated the effects of such increases, and many Americans remain under considerable financial stress (Reich 2022). If put into use, increasing interest rates will worsen this stress, especially for those already most vulnerable. Rather, The labor shortage needs to be addressed at its roots. Future solutions must begin with businesses cultivating attractive and incentivizing opportunities for workers who have historically felt unappreciated, overworked, and underpaid. Any presented remedy to this issue should include implementing healthcare, child care, and paid leave to support people who have children that need hands-on care. Investing in labor will increase profit and productivity, stimulating economic spending and growth (Greenspon 2022), and is thus synonymous with an investment in economic growth. 

The United States is undoubtedly facing a labor shortage, characterized by a high population and lack of people looking for jobs. The attributed causes for this, including the increase of early retirements and the decrease of women in the workforce, have overlooked the supply-side considerations of this shortage. This places the blame on workers rather than where it belongs: on businesses and government policy.  This shortage illuminates workers' vitality as an important part of companies, and it is time businesses treat their employees as such. In order to address this, solutions must evolve to increase the number of quality jobs for workers and ensure all workers have access to jobs that allow them to feel respected, valuable, and financially secure. If this continues unaddressed, the economy of the United States will suffer, exacerbating the already threatened supply chain, decreasing GDP, increasing inflation, tanking stock markets, and placing it at risk of a future recession. 

References

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